- According to Islam Faisal
- Economic editor
The seasonal spirit is still alive at Liverpool’s Christmas market. Between the roasted chestnuts and personalized decorations, it doesn’t seem like these are tough economic times.
But on the surface, it doesn’t take much to see the economy is far from taking off or truly turning around from the cost of living crisis.
There are concerns about what will happen in January and February.
One father told us quite matter-of-factly that he had just been repossessed and moved back in with his parents after his apartment’s mortgage payments skyrocketed.
A Southport woman said she sold her car after her car insurance premiums suddenly more than doubled to £115 a month.
Large swaths of the country are having to make significant adjustments to stay afloat as prices and interest rates remain high.
While the inflation rate has fallen below 5%, the significance here and the evidence in the wider numbers is that the country has not yet been able to put a stop to the cost of living crisis.
A turning point has been definitively called for elsewhere.
In the US, the person responsible for setting key interest rates, Federal Reserve Chairman Jerome Powell, said it was time to start discussing interest rate cuts. In the absence of further shocks, the Fed has now distributed all its anti-inflation medicine.
As is known, this “pivot” has been called in financial markets in recent weeks.
Markets have bet that interest rates will be cut next year and that has had the effect of automatically pushing down borrowing costs for fixed loans.
David Williams, a mortgage broker in Merseyside, is relieved to be able to offer two- and five-year fixed-rate mortgages starting with the digit 4. Sometime this year the 6% increase has become the standard. But this is still a shock to the hundreds of thousands of people launching fixes at extremely low rates.
The fall in market interest rates in the UK is less pronounced than elsewhere. And this week, the Bank of England chose not to pivot to base interest rates like its American counterpart. Here, Bank Governor Andrew Bailey said, it is not yet time to talk about cutting interest rates.
When considering its holdings, the Bank points out that inflation has fallen less here and that wage inflation is “significantly higher in the UK than elsewhere”. There is no “Mission Accomplished” banner for the Bank of England.
Inflation in the UK is no longer stuck but remains higher than other major economies and that means there is less room to cut interest rates.
However, another important feature of the past few months is that the economy has not fallen into recession as many predicted. That’s not an unreasonable forecast given the fallout from tripling energy prices, skyrocketing mobile and broadband bills and borrowing costs.
At last month’s Autumn Statement, the Office for Budget Responsibility pointed to the fact that the economy so far should have received a net boost from rising interest rates. More broadly, across the economy, some households’ increased savings income by far outweighs the increased mortgage costs.
Above all, as I wrote in the summer, banks have tried their best to avoid repossessions. At the time, a banker told me that as long as someone was willing to pay anything for their mortgage they would keep people in their homes.
Mortgage broker Mr Williams confirms exceptional flexibility in extending the mortgage period to reduce payments. “When we talk about mortgages, they have a longer time horizon — about 10 to 15 years, depending on their age,” he told me. This may come back to haunt homeowners in the future, but for now everyone is content to “stretch and pretend”.
The overall result is that the impact on consumers from interest rate increases so far has not been as severe as expected. The Bank of England points out that around half of the impact is still felt when people cancel old mortgages. January and February can really be tough.
The Bank of England said there was no change in interest rates and there could be no change for many months. But there is no growth forecast for the economy for the best part of the year, if its predictions are to be trusted at all.
It was a softer landing than expected. But there’s no takeoff on the horizon either.